Taxes and the Home Office Rules

Are you part of the growing number of self-employed entrepreneurs or telecommuting employees who are working from home? If so, a home office deduction could provide a valuable tax benefit. Here’s a brief overview of the basic rules for deducting a home office.

 What’s required?

The first requirement is that you have a part of your home that you use regularly and exclusively for business purposes. It doesn’t have to be a separate room, but it must be a clearly defined area. The exclusive use is very important. The area must be reserved only for business use; if you also use it for personal activities, it won’t qualify. The only exceptions are if you store business samples or inventory at home, or if you run a home day - care business. The second requirement is that your home office must be one of the following:

• Your principal place of business. That’s the place where you conduct most of the management and administrative activities of running your business.

• A place where you regularly meet customers, clients, or patients. Even if you run the business from another location, a home office can qualify if you regularly use it for meeting with customers, clients, or patients.

• A separate building, not connected to your home. A freestanding garage or studio will qualify if it is used in your business.

 What’s deductible?

If you have an area of your home that qualifies, you can generally deduct a percentage of your total costs, including mortgage interest, insurance, taxes, and utilities. The percentage is calculated as the area used for business divided by your home’s total area. For the self-employed, home office deductions are limited to the net income of the business. An employee’s home office must be for the convenience of the employer, and this should be documented in writing. Deductions for employees, other than mortgage interest and taxes, are available only to the extent they exceed 2% of adjusted gross income. The rules on home offices are complex, with many gray areas. Contact our office if you need more information or assistance.

Home Office Deduction - New simplified deduction

The IRS permits taxpayers to use a simplified method for deducting the use of a portion of their home for business. Taxpayers who qualify may use the new optional deduction calculated at $5 a square foot for up to 300 square feet of an area in the home that is used regularly and exclusively for business. The deduction is capped at $1,500 a year.

Thursday, August 28, 2014